Washing money: The different forms of money laundering

September 1st, 2017

xBookmark

By Jason de Mink

The United Nations (UN) estimates that the amount of money laundered in a year is between 2% to 5% of global gross domestic product (GDP), or between US$ 800 billion to US$ 2 trillion. That number is staggering when one considers that the entire South African GDP for 2016 was approximately US$ 329 billion.

Money laundering takes many forms and embraces all manner of technologies, from the most basic to the extremely sophisticated. In general, by its very definition, money laundering involves money as its central store of value.

However, recent trends have been detected that indicate a worrying trend away from the use of money as a store of value for criminal enterprises, with the shift being to everyday commodities and goods that are legal and can be easily obtained, transported and sold.

The concept of money laundering

The term ‘money laundering’ vividly describes the process by which the proceeds of criminal activities are sanitised so that they may be introduced into the mainstream economy without retaining any hint of their illegitimate source.

The term ‘money laundering’ dates back to the days of Prohibition (during 1920 to 1933) in the United States (US). The prohibition on alcohol and a broad restriction on gambling created opportunities to make large amounts of cash for those individuals, known as ‘bootleggers’, prepared to break the law. Success in these illegal activities created an immediate problem for the ‘bootleggers’ as to what to do with all the money generated. Opening a cash-intensive business was the obvious thing to do. Laundries were seen as a suitable business and, so the rumour goes, the term ‘money laundering’ was coined.

However, the phenomenon of money laundering stretches back several thousand years. In China, as far back as 2000 BC, it has been recorded that wealthy merchants would disperse, disguise and hide their wealth from despotic rulers who wanted to appropriate their wealth and simply kill or banish them after taking it.

Stores of value

Whatever the origins of the term, criminals have progressively moved into businesses where the cash yielded was ever higher – including production and sale of illegal narcotics and drugs. However, for the modern day ‘bootlegger’ there is an ongoing problem, in that success in these types of businesses comes at a price – literally. Cash is bulky and ultimately traceable, difficult and dangerous to transport in volume and of no intrinsic value unless actually spent to acquire an asset or service. So criminals need an alternative or an adjunct to money, as a store of value.

Traditionally gold remains one of the main non-currency means of holding money, including laundered money, with diamonds a close second.

The problem with such stores of value is that they are not always readily attainable, do not lend themselves to being divided into small values or denominations, generally require expertise to transport and exchange and can only be sold on to a limited number of specialists, legitimate and illegitimate, who deal in these commodities.

Latest trends

A growing trend has, therefore, emerged where readily available and easily exchangeable commodities have replaced cash as a means of payment, especially in the illegal drugs trade. It would appear as if there is something of a move back to the barter system, where criminals are happy to accept payment in goods as opposed to hard currency.

Criminals favour products that are small and expensive because they have a value that is disproportionate to their size and there is generally a steady demand for them, namely, razor blades, infant formula, gift cards, perfumes, cosmetics and over-the-counter medications. As they are commonly pilfered, many of these items are kept behind shop counters, are locked up or are tagged.

Laundry detergent

One slightly more bizarre example from the US is the widespread use of laundry detergent as a currency. While it is a little bulkier than most of the items on the list above, a bottle of ‘Tide’ laundry detergent would seem to make a good substitute store of value because it is a leading brand, everybody needs it, and it is pricey. One bottle can cost up to US$ 20 retail.

This phenomenon was discovered inadvertently when US police forces raiding suspected drug houses found large quantities of ‘Tide’. At first it was suspected that ingredients in the detergent were used to manufacture drugs. However, it soon became apparent that the detergent was being used as currency to buy the drugs themselves. Police then noticed an increase in organised and widespread theft of well-known laundry detergent brands and began to track a trend where bottles of detergent have become ad hoc street currency. For example, US$ 20 bottles of laundry detergent are selling for either US$ 5 cash or US$ 10 worth of marijuana or crack cocaine, earning it a new nickname: ‘Liquid gold’.

However, laundry detergent is not just used as a currency in the drug market but has become the ultimate target of the theft, totally distinct from the drugs trade. Criminals have performed a cost-benefit analysis of stealing a bottle of laundry detergent and have identified it as high reward and low risk. The penalty for shoplifting in most jurisdictions is often just a small fine, with no jail time, as opposed to the far more severe penalty for dealing in drugs. The trade in stolen laundry detergent has, therefore, in some ways become more lucrative than the drugs it was originally traded for.

Stolen bottles of laundry detergent are not easily traceable and businesses have a strong incentive to buy the product on the black-market as opposed to the official supplier. While a shop selling legally-sourced laundry detergent for US$ 20 may make a US$ 2 profit per bottle, purchasing that same detergent for US$ 5 from a black-marketer translates into a US$ 15 profit.

‘Tide’, as a premium and heavily advertised brand, has been recognised as a stable and readily exchangeable store of value, with a healthy resale value. The black-market trade in this substance is so widespread that US law enforcement agencies have recently discovered that large quantities of liquid detergent have been transported to other jurisdictions, particularly in the Far East.

Ironically, black-market trade in this product also has another aspect – it can be copied and fake laundry detergent packaged as the real thing can also be sold at a profit, as another means of utilising and co-mingling illegitimate funds or as a business in itself.

Ice cream

Another more recent, and just as bizarre example, is the theft of expensive Ben & Jerry’s and Häagen-Dazs ice cream, which the thieves will almost immediately sell to a middle-man or direct to a store-owner in order to turn a quick profit. Some investigations have revealed syndicates who steal ice-cream, store it and then re-sell it in bulk once a sufficient quantity has been obtained.

As with the laundry detergent, thieves have determined that ice cream is an easy item to steal and re-sell, with many unscrupulous retailers willing to acquire the stolen merchandise for onward sale in their shops.

Cheese

Finally, strangest of all, the UK Center for Retail Research, has conducted a global survey that has determined that cheese is the most stolen food in the world.

The reasons for individual criminals targeting this particular commodity seem clear, including high demand, easy disposal by thieves and small, mobile formats that make it easy to conceal and transport.

Cheese is an item that one criminologist describes as ‘craved’ – concealable, removable, available, valuable, enjoyable and disposable. Unlike many items that would also fall under the ‘craved’ description like razor blades or electronics, cheese is not usually fitted with any type of security tag. It is small and easy to conceal in clothing, a handbag or a baby buggy and with the price of quality cheese rising, much of the theft is for resale to retailers or to restaurants.

However, it is not just individual shoplifters who are involved. It appears as if crime syndicates have expanded their operations into stealing and then reselling large volumes of cheese or even manufacturing ‘illegal’ cheese.

In Italy for example, robbers have made off with an estimated € 6 million worth of Italy’s prized Parmigiano-Reggiano cheese over the past two years.

Like laundry detergent and ice cream there is also thriving black-market trade in this product in countries like Russia where in 2015 police, acting against a criminal syndicate, seized US$ 30 million of contraband Cheddar.

Producing fake or adulterated products is also a method to generate illegal profits or to promote illicit activity. A 2013 US Food and Drug Administration investigation, undertaken in conjunction with the US Inland Revenue Service, found that items labeled as ‘100 percent real Parmesan and Romano cheese’ distributed through two national companies contained a combination of Swiss, Mozzarella and white Cheddar cheeses, as well as large amounts of wood pulp (www.fda.gov, accessed 7-8-2017). These high-end products generated massive profits at far below normal cost, allowing the companies to appear highly competitive and profitable, while also providing a perfect cover to launder illicit funds.

In countries struggling to combat drug cartels, such as El Salvador, cheese exports have been strong year on year, despite there being virtually no cheese manufacturing companies within the country. Basing a money laundering operation around cheese is not as farfetched as one may initially assume. The legal infrastructure (manufacture, transport, export etcetera) allows the criminal gangs to openly integrate their funds into the mainstream and to take advantage of legitimate business ventures as a cover to co-opt and suborn the police, judicial, and immigration systems. The result is a vast, multinational, and multidimensional criminal network, disguised as a legitimate business that includes drug-trafficking and human-smuggling.

Criminal syndicates in Italy such as the Camorra (the Neapolitan Mafia) invest large amounts of illegitimate money into legitimate cheese manufacturing businesses. As obtaining maximum profit is of less concern than laundering dirty money, these criminal cheese enterprises can sell their products below market prices, competing unfairly with honest competitors while simultaneously generating seemingly legitimate profits.

What makes cheese production an attractive proposition for the money launderer?

The manufacturing process, from raising cows to investing in the means of production, can be extremely costly. A cheese company is, therefore, a prime opportunity for a money laundering operation to process large sums of money without raising suspicions. Having acquired the product and its means of production by using ‘dirty’ money, the launderer can then generate massive amounts of ‘clean’ money when the cheese is sold.

Cheese sells for relatively high prices compared to other popular foods and it is, therefore, much more efficient to sell a block of cheese compared to high volume products like wheat or rice.

Cheese is a staple around the world and has no clear substitute. The relative stability of cheese demand allows crime syndicates the ability to forecast revenues. While a downturn in the economy may cause the demand for certain other types of ‘luxury’ foods to fall drastically as consumers switch to cheaper alternatives or abandon these foods altogether, for many cultures in the world, substituting or removing cheese is simply not possible.

Although luxury cheese products and famous brands do exist, most cheese exists as a commodity. Consumers are less concerned about the producer of the cheese they are buying compared to the price of the cheese. This characteristic makes it easier for organised crime to start a cheese business and compete in the market immediately.

Conclusion

While law enforcement agencies today are on high alert for suspicious transactions involving the traditional assets associated with money launderers, such as property, luxury vehicles, boats and jewellery, one asset that gets far less attention is cheese. It would appear as if ongoing demand for a product that is hard to substitute has created largely unknown links to black markets, criminal activities and money laundering.

It may be possible that the Mozzarella on your pizza or a delicious piece of Camembert may be the vehicle whereby criminals disguise and shift money originating from illicit activity.

Far more concerning than the simple issue of ‘criminal’ cheese is the number of other foods that share the same characteristics as cheese mentioned above. While one can easily abstain from activities traditionally associated with crime such as drugs, gambling, and stolen or pirated goods, it is far more difficult to avoid or identify illicit food.

In the world of the money-launderer it appears as if nothing is sacred.

Jason de Mink BA LLB LLM (UCT) Certificate in Money Laundering Detection and Investigation (UP) is an attorney at De Mink Attorneys in Cape Town.